Where does the S&P 500 go from here?
the S&P 500 (ASX: SPY) has been to sell since peaking at an all-time high of $479.98 on Jan. 3, 2022. Shares fell as low as $410.64 before staging a rebound attempt. Since pandemic low of $218.26 established in March 2020, the “buy the dip” strategy worked well for the most part. However, there is one main reason why this no longer works and may not work in the future, higher interest rates. The US Federal Reserve has been incredibly dovish with its quantitative easing (QE) pumping out more than $120 billion per month in asset purchases, swelling the balance sheet to nearly $9 trillion. Easy money has been a boon to investors and a bane to savers. interest rate literally non-existent and a scourge for consumers because it allowed inflation to reach the highest levels in 40 years at 7.5%. That’s a far cry from the 2% inflation rate the Fed has targeted. The question is why did the Fed let inflation climb so high?
Transient or lasting?
Due to the COVID-19 pandemic and self-inflicted economic shutdowns from shutdowns, the drop in productivity was expected to be temporary. On the other hand, the post-reopening recovery rebound was also expected to be temporary as it overshoots. Replace the word temporary with the term transitional and that’s what Fed Chairman Jerome Powell has been preaching throughout 2021. Inflationary pressures are due to peak demand overwhelming the supply shortage following the reopening of the pandemic. Everything is temporary and will return to “normal”, right? However, the problem is that shutting down factories and production and then bringing them back online is not an easy or cheap task. This is evident by the worldwide shortage of chips and supply chain disruptions we see globally. Food, fuel and salary inflation was unleashed as the United States experienced the fastest spike in the CPI in four decades. The Fed changed its rhetoric and eliminated the word “transitional” from its vocabulary. Given that unemployment is at an all-time low below 4%, the “coast is free” to gradually begin monetary tightening.
We have been in a period of monetary expansion since the pandemic. Now is the time to pay the piper (return). This means reducing the monthly bond-buying program (QE) and almost eliminating it in the first quarter of 2022. It also means reducing the Fed’s huge balance sheet by nearly $9 trillion. The most important thing is to raise interest rates to combat inflationary pressures. The combination of the three is behind the process of monetary tightening designed to curb the pace of economic expansion and inflationary pressures. Naturally, this is bearish for asset prices, especially stocks. The stock market moves on rumor and resolves on news. The anticipation of higher rates and a transition to a hawkish stance was evidenced by the December FOMC meeting minutes. This triggered the stock market’s cliff fall in early January 2022, as the SPY fell nearly 10% from its highs and the Nasdaq fell 20% from its highs in late February, before the recent rebound. There is widespread speculation that the Fed will raise interest rates 3 to 6 or 7 times, as JPMorgan Chase’s Jamie Dimon commented on his earnings conference call. Ultimately, higher interest rates mean lower markets as the “risk-free” position takes effect. the Russian invasion of Ukraine causes oil prices to spike and ensuing sanctions against Russia will impact commodity prices in the United States and around the world. While some believe the Fed may be tempering its hawkish stance due to geopolitical events, if the result is accelerating inflationary pressures, the Fed will need to react even stronger to offset the expected surge. This year could very well be one of defensive play as the whole market sentiment has reversed with the Federal Reserve’s stance on interest rates. There will be opportunities for investors and traders who administer discipline and patience in the face of panic and FOMO. Let’s see where the most opportunistic spots will be on the SPY.
SPY Price Trajectories
Using rifle paintings over monthly, weekly and daily periods provides an overview of the SPY. SPY reached a pandemic low of $218.26 on March 24, 2020 from a high of $337.34 on February 19, 2020. SPY then bounced back to a high of $479.98 on January 4, 2022 Shares then fell to a short-term low of $410.64 before attempting a significant rally. Watch key Fibonacci level (fib)s using the pandemic low at the post-pandemic high (net 261.72 points) provides a key 50% retracement level at $349.12 and the powerful 61.8% fib retracement zone at $318.24, which is the ultimate buying zone for traders and investors. The monthly rifle chart is the broadest time frame offering the widest and arguably most effective view for long-term investors. For two years, the monthly uptrend in the Rifles chart lasted before finally forming a high market structure (MSH) sell trigger on a breakdown below $410.64. The monthly stochastic has mini reverse jagged pups but is still above the 80 band. If the monthly Stochastic falls below the 80 band, look below as a deeper swing could possibly sell the market towards the 0.50 and 0.618 fib retracements at $349.12 and $318.24, respectively. This would usher in a bear market. Both are excellent buy/mid levels for investors to consider moving into long positions. Meanwhile, the weekly Rifles chart saw a full swing, dropping from the 80 band to the 30 band before attempting to move higher after the markets bottomed out. Russian invasion of Ukraine. Key resistance at the 50-period weekly moving average (MA) is $439.03 with weekly 5-period MA resistance at $440.62. If the weekly stochastic manages to cross, a narrowing channel towards the weekly 15-period MA is possible at $455.29. However, if the weekly stochastic reel attempt turns into a reverse mini pup, then further selling is possible towards the $0.50 retracement area of $349.12 and the powerful 200-period weekly MA at $338.45, which coincidentally happens to be close to the pre-pandemic highs (339.08) made in 2020. The daily rifle chart illustrates the short-term buy trigger of the daily market structure low (MSL) above $437.75 based on the strong reversal attempt as the Stochastic reels out of the 20 band. Keep in mind that bear markets have very sharp bounces, but the larger timeframes should be put into perspective to assess the general downward trend of the market. In summary, expect the market to rebound off the daily MSL triggers first, but the longer term charts of the weekly and especially the monthly should be respected and used to assess areas to sell on the rebounds . The ideal areas to buy are when the SPY drops to the $349.12-$218.25 levels, representing a host of supports including the 0.50 fib to 0.618 fib retracements and the weekly 200 period MA .